Beating the S&P 500 is what every investor aims to do, and doing so for a long time is a coveted achievement. Unfortunately, most hedge fund managers and retail investors have been unable to beat the benchmark. You’d often hear the advice to buy and hold a low-cost S&P 500 ETF, like the SPY, and forget about stock-picking or ETFs that track other benchmarks.
That advice is not inherently wrong, but it hasn’t been the best course of action in recent history. The S&P 500 has outperformed most assets over the last century, but in the past three decades, those gains have been driven by a few key industries. Putting more weight here can amplify your gains significantly in the future, as these megatrends only appear to be getting stronger.
You can use ETFs that lean into these outperforming sectors and use them as satellite holdings alongside an S&P 500 ETF to outperform the benchmark.
Here are two such ETFs to look into:
VanEck Semiconductor ETF (SMH)
Semiconductor stocks have performed exceptionally well, surpassing even some of the most bullish expectations. Moore’s Law says the transistor count doubles, and Wall Street seems to be applying that to the stock price, too.
VanEck Semiconductor ETF (NASDAQ:SMH | SMH Price Prediction) replicates the performance of the MVIS US Listed Semiconductor 25 Index. This lets it have exposure to a broad number of companies manufacturing or designing semiconductors. It is the largest semiconductor ETF you can buy, with total net assets of over $29 billion.
SMH has gained 263.6% in the past five years. This is significantly higher than the S&P 500’s gains of around 99.8% as of this writing. The drawdowns are higher, but compare SPY with SMH on a multi-year basis, and it has never fallen behind since the Great Recession. It is up 24.8% year-to-date, vs. the SPY’s 13% gain.
The biggest holding here is Nvidia (NASDAQ:NVDA), and it constitutes 21.25% of SMH’s holdings. This can be a problem if NVDA has a bad quarter and craters. Still, the S&P 500 itself has 7.17% exposure to NVDA.
The expense ratio is just 0.35%, or $35 per $10,000. This is very cheap for an ETF with strong historical performance.
Invesco S&P 500 Momentum ETF (SPMO)
Invesco S&P 500 Momentum ETF (NYSEARCA:SPMO) is one of the best ETFs to hold in the current environment. It focuses on the top 100 S&P 500 stocks with the strongest recent price performance and highest momentum scores. This ETF has consistently kept on par with the SPY or has outperformed it.
Recent performance has been exceptional. SPMO has also managed to deliver shallower losses than the SPY during downturns.
The strategy is to invest at least 90% of its assets in stocks in the S&P 500 Momentum Index.
The underlying index selects stocks based on their “momentum score,” which measures significant price increases over a period while adjusting for volatility to ensure smoother price appreciation. The fund holds approximately 98 to 101 stocks and is reconstituted and rebalanced twice yearly on the third Fridays of March and September.
The biggest “caveat” here is that SPMO is vulnerable to a flash crash. If the market goes through a sudden reversal where the momentum stocks it has exposure to start falling significantly, it would be a while before SPMO could get rid of the underperformers. That said, SPMO holds ~100 stocks, so any underperformance would likely remain in line with the benchmark.
SPMO has gained 153% over the past five years. It is up 26.8% year-to-date. The expense ratio is 0.13%, or $13 per $10,000.
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